Too Much Money

By Michael Lombardi, MBA Published : November 20, 2006

U.S. mutual funds are sitting on a record $10 trillion in assets–a big increase from the $6 trillion they held only in 2002. This money has to make its way into investments. Thus, we have a severely overpriced stock market with investors chasing high earnings multiples and low dividend yields. How will it all end for investors?

A lot has to do with investor sentiment and how they are feeling about the economy and their own wealth. Investors can’t be feeling too good about the U.S. housing picture, and for that matter the value of their own homes, right now.

As easy as money goes into mutual funds, it can come out. These days it’s very difficult to find a fund manager who reports lots of good stocks to choose in today’s market. That’s because there is too much money chasing too few investment values.

Since mutual funds were invented, there has never been a “run” on mutual funds like there has been on U.S. banks in the past. A “run” happens when everyone wants their money out and they can’t get it out fast enough. With record bonuses been paid out this year on Wall Street, a “run” on investment money is the last thing Wall Street has on its mind.

When a Chinese bank decided to sell $19 billion in equity last month, they had orders for $500 billion of stock–26 times what they were offering for sale. Again, too much money chasing too few investments.

Aside from money pouring into mutual funds, you have world banks continually expanding the money supply. It’s estimated the industrialized countries of the world increased their money supply by an average of 9% last year. This year it’s estimated to rise by 8%. Hence, in two years world central banks have increased the money supply by 17%. This would have been unheard of years ago.

How will it all end? Simple economics tells us that too much of anything (over supply) will eventually cause demand to fall. And this is what I see eventually happening with the almighty U.S. dollar. There are too many U.S. dollars around. We have foreign central banks increasing their money supply and their money supply is mostly backed by U.S. dollars.

We’ve never been through a period in history with so much money in the system. Courtesy of a U.S. Fed that brought interest rates to half-century lows… courtesy of a U.S. Fed that increased the money supply in an all out effort to stimulate the U.S. economy… the economic picture will no longer be rosy when low interest and an expanding money supply no longer stimulate the economy.

NEWSFLASH–U.S. housing starts fell in October to the lowest level in six years. Starts are down 27% from last year. While former Fed Chairman Greenspan has publicly stated he believes the worst in the housing market is behind us, one has to wonder why Greenspan would make such statements. The numbers coming out of the U.S. Commerce Department on housing, the sales, starts, inventory… they are all getting progressively worse, not better.